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February 22, 2018 | Capitulation II

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

The politicians giveth. They taketh away. They also screweth over.

One day after BC’s tax-tax budget, with reflection, thought and a few single-malts, it’s clear government has crossed a line. Elected officials have purposely, deliberately, set a course to crash a housing market. And they admit it.

When Finance Minister Carole James was asked, bald-faced, if the Dippers are attempting to engineer a price plop, she said, “Yes.” Then she admitted the province brought in $500 million in new annual housing taxes without actually knowing the consequences. “We’re take some very bold steps. There are firsts here and we’re going to track it carefully.”

Legislation without modelling. This must be a first. To its credit the BC realtors’ association had a stark response: “I can’t imagine a government telling homebuyers who bought a home in the last year that we are purposefully trying to put you under water.” And under the waves could cover a shocking number of people.

If prices in Van drop just 25%, which suddenly seems like a no-brainer possibility, a stunning one quarter of all households with mortgages go into negative equity. That means their mortgages are greater in size than their property is actually worth. Yikes. And not only would they have a monster debt and have shed their savings/downpayment, but mortgage rates are guaranteed to increase this year and next, completely diddling the family balance sheet.

It gets worse.

A politically-driven market decline – now almost certain with the spec tax, the 20% go-home tax, the higher property tax, the empty houses tax plus the expansion to most of the province, along with rising loan rates and the borrower stress test – will mean lower appraisals, decreased lending limits, reduced mortgage originations, job loss and (most significant) less building. So fewer new homes. Just when the populace is screaming for ‘more supply.’

If private construction slows (count on it) the $6 billion in public money the NDP is committing to build ‘affordable’ homes will seem like one widdle finger in a bursting seawall – leading to more spending and more taxes.

But it gets even worse.

The ‘speculation tax’ – 2% annually of a property’s value by next year – isn’t a tax on speckers or flippers at all. It’s just another hit on the wealthy. And the definition of rich is anyone owning two properties. While most BCers support this because they think it pokes a stick in the eye of well-off foreigners, the biggest impact could be on Canadians, and the locals whose cottages, cabins, ski lodges and recreational properties are about to be creamed.

Far more ‘second’ properties in BC are owned by folks who live in Alberta or Ontario than in China. There are thousands of resort homes in the mountains or the Okanagan which for decades have been in the possession of families in Calgary or Edmonton, while a prime market for Victoria condos has always been southern Ontario. Now those people – the Dippers have confirmed – will be slapped with a 2% tax that will cost $1,000 a month on a property assessed by the province at $600,000.

Only by renting the property out continuously on a one-year term, moving in full-time, or getting a job and paying income tax in BC, can this Hoovering be stopped. Meanwhile the owners from other provinces pay local property tax. They pay income tax. They pay sales tax, gas tax, utility bills and spend millions on goods and services while at home in BC. “This changes the economics of buying and holding real estate,” says BeeMo economist Robert Kavcic. And as a result, you can expect a wave of sales – and the same downward pressure on prices in the rural areas as will occur in YVR, Victoria, Kelowna and the LM.

It’s a sad Balkanization of the country. Now dudes from the GTA are just as unwelcome on the Left Coast as dudes from Guangdong. The incentive to dump assets in BC is huge – exactly what the NDP and its supporters seem to cheer for.

So, put it all together. Scary. A forced market meltdown. A debt crisis in an untold number of households. Reduced economic activity. The expulsion of fellow Canadians. Tax, tax and more tax. And yet, if Vancouver real estate prices dropped by 50% – plunging the province into recession – 98% of the population still could not afford a detached house.

Higher mortgage rates, new borrowing regs and moronic household debt levels were bringing a market correction anyway. Political incompetence might make it Biblical.

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February 22nd, 2018

Posted In: The Greater Fool

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